Liability: Legal Definition and Real-World Examples for Investors

Some of the basic questions we get about liability include:

What exactly is liability?
Why does it matter for a real estate investor?
What kinds of situations can make a person liable?
Can you argue and win against these charges?
Are there ways to avoid liability?

Liability is basically any reason you might end up in court. Think of liability as the lifeblood of a lawsuit. Lawsuits tend to resolve in either settlements or judgments, some common misconceptions about liability and lawsuits.

Legal Definition of Liability

“Responsible for or answerable in law” is the exact legal definition of liability. Essentially, if someone is “found liable,” this means they are on the hook for any damage or harm caused in the situation and can be required to pay for your mistake or oversight.

Liability doesn’t always include malicious intentions, such as blatant fraud. In the real estate world, most liability issues are accidents. A real estate investor can be held liable without intentionally doing anything wrong. Here’s a real-world example where an investor got legal documents online and ended up getting more than he bargained for:

Example: When Online Contracts Come Back To Bite You

Paul decided to buy a small home in Florida and rent it out for profit.

To save on expenses, Paul decided to print a template rental agreement off of the internet. “Why hire an attorney,” Paul reasoned, “when I can find what I need online for free?” He read it over, and it seemed to cover all of the basics. He typed his name and address at the top and called it a day.

Paul quickly found a tenant, a law student named Ed, who paid him a $1,200 security deposit and $800 per month for rent. Ed signed a one-year lease and the aforementioned rental agreement. Ed was a model tenant. But a year later, Ed wanted to marry his longtime girlfriend and move in with her. He left the property in the same condition he found it, and asked for the security deposit back.

Paul referred back to his rental agreement, which stated that he would return the deposit within 90 days of Ed moving out.

Then 83 days later, Paul received notice that he was being sued. He was understandably confused—according to the document, both he and Ed had signed, he still had a week to make the payment!

Here’s what Paul didn’t realize: Florida law requires security deposits to be returned within 15-60 days of the tenant moving out. Ed learned this in a law class, and when he couldn’t immediately reach Paul, opted to sue for the return of the deposit. The suit pointed out that Paul also neglected to include a copy of Florida Statute § 83.49(3) in the lease, as is required by state law. Paul found himself in Municipal Court by a first-year law student and now had a whole new headache on his hands.

The first mistake Paul made was using Google, J.D. in place of an actual real estate attorney. A lawyer would have quickly caught the unenforceable part of the contract and made the necessary revisions. That same lawyer also would have advised Paul about his responsibility to include the state statute in the lease. By trying to save a few dollars, Paul ended up costing himself way more time and money dealing with the issue in court.

The second mistake Paul made was not handling the security deposit properly. Breaking a state law is pretty much a way to guarantee you will be sued. The moral of this story for investors is that you should always be educated on state laws and common situations that can turn into lawsuits. This is why you want a real estate attorney in your corner. We know attorneys aren’t cheap—but would you rather spend some money now to stay out of court altogether, or risk it all when someone does sue you?

To better understand how to avoid the courtroom, let’s look at five of the most common situations that can get a landlord on the business end of a lawsuit.

Let’s take a closer look at how proactivity can keep you out of court.

Common Types of Lawsuits

Real estate investors should be aware of some of the common situations that get landlords into court. Once you are aware of these issues, you can anticipate them. Some of the most common types of suits arise out of the following situations:

Discrimination. The Fair Housing Act (FHA) applies in every state in the United States. You can’t discriminate on the basis of sex, gender, disability status, or any other “protected” class.
Security deposit issues. Each state has specific laws governing how much landlords can charge for a security deposit, how soon it must be returned after move-out, and where lawsuits over security deposits can take place.
Eviction issues. If you’re going to evict someone, you must do so legally. For instance, you can’t kill the electricity to force a tenant to vacate.
Repair and maintenance issues. In most states, you’re obligated to make repairs and generally keep a home livable. While there’s some murky territory about what constitutes habitable, it’s always best to make repairs as quickly as possible. Learn more about landlord obligations regarding repairs and avoiding this type of liability.
Contractor and property management issues. You can be held liable for the actions of your employees.

Good communication, documentation, and legal counsel can help you avoid many of these issues. Still, you should approach all of the above situations with caution and be proactive.

Avoiding Liability

Fortunately, there are many legal tools available for real estate investors when it comes to avoiding liability. The basics include:

Contracts. Well-written, crystal clear contracts (which include lease agreements) can assist every investor. Ideally, you want a contract that is detailed but clear. A skilled attorney can assist you with this matter.
Corporate structures. The first rule of asset protection, and one we will drill into your head many times, is to never, ever own property in your own name. Instead, smart investors use corporations like LLCs, Series LLCs, etc.
Trusts. The Anonymous Land Trust is just one example of the many options available. Real estate investors can use the land trust to avoid holding property in their own name. When paired with an entity like a Series LLC, Land Trusts can be a crucial part of your asset protection plan.

While a lawyer can argue against liability in court, we find that with asset protection strategy that includes these tools, you can literally stop a lawsuit before it’s even filed.

Bottom Line: Contain Liability and Prevent Lawsuits with Asset Protection

You’ve already taken a critical step toward protecting yourself as an investor. Now that you have a basic understanding of liability, you can begin taking steps to avoiding personal liability and liability for your business.

The goal of asset protection is, obviously, to protect what you own. We found the best way to accomplish that is to make yourself impossible to sue. If you are sued, a properly-employed asset protection plan will protect your personal assets and make the target of your lawsuit a company that doesn’t own anything for the other party to collect even if they do “win.” If there’s nothing to gain, most people won’t bother with the expense of even filing a lawsuit in the first place. As with any fight, you shouldn’t make yourself an easy target.

Land Trust: The Benefits Of The Structure

As we continue our series on the land trust, it’s time to turn our attention toward the major benefits of this structure. Whether you are old friends with this time-tested real estate tool or have never heard of it in your life, the land trust or title-holding trust can truly be the real estate investor’s best friend. Let’s get right into the three most essential benefits of the land trust, an under appreciated yet powerful legal tool.

Benefit #1: Land Trusts Protect Your Anonymity

If most intelligent people are given the choice between anonymity and oversharing, they tend to like the former. Anonymity makes lawsuits a serious pain, and can actually prevent them if the other party isn’t particularly motivated. Learn more about the inherent benefits of anonymity for asset protection. Or, learn how to get even better protection from the next tip.

Benefit #2: Land Trusts Make Lawsuits Against You Harder

The land trust’s anonymity powers help it prevent lawsuits. Anonymity alone is rarely a good asset protection plan. But by the same logic, it’s impossible to have a highly effective, what we like to call “judgment-proof” package.

Anonymous land trusts can own companies, disguising you personally and your ownership.
Your entity strips the asset of inherent liability and separates it legally from you.
In the event of a lawsuit, entities are legally separate from you and your assets (when structured properly).

Trusts are more difficult to sue than individuals. Trusts paired with entities are even more difficult, and we’re about to explain why in detail. Pay attention if you’re looking for an ironclad asset protection strategy that stops suits before they start at all.

Benefit #3: Land Trusts Kick Ass at Preventing Lawsuits When Paired With Entities.

Of course the asset protection folks save the asset protection benefits for last. But think about it: anonymity is something you need, and the land trust removes property from your own name. It doesn’t have to stay there, though. You can reduce your chances of a lawsuit against you to almost “none” by simply pairing the land trust with an appropriate entity. We’ll give you the play-by-play of both why you need to do this and how.

To build a high quality asset protection system, pair the humble land trust with a liability-limiting entity. This is a highly intelligent, easy-to-manage, cost-effective way to approach a basic asset protection strategy. Here are the very broad strokes of real estate investors effectively pairing entities and land trusts actually looks like.

Protecting Assets With One-Property-Per-LLC Strategy

First, think of one of your investments. If you don’t have one, imagine your dream spot--maybe in a place you’d like to vacation to. Now, we don’t want anyone coming after that badass property in court. So you might stick it in a Traditional LLC. An ideal strategy is compartmentalized as well as anonymous.

Compartmentalization is the second key of your plan, and it’s your entity’s main job. One Traditional LLC can protect one asset completely as a holding company, or you may choose to use it as a shell company to assume operations for a Series LLC.

Series LLCs are ideal for the investor or multi-property owner because you can have as many “compartments” (Series, miniature liability-protected companies) as you like. Learn more from our educational Series LLC content on this structure’s benefits, uses, and FAQs. But for now, just understand that the Series LLC achieves perfect compartmentalization, with each of your assets snugly secured inside its own Series.

Compartmentalization compliments anonymity brilliantly, and is indeed what we call one of the pillars of asset protection. If your assets aren’t connected to you, and nobody can figure out who the hell you are, you because a righteous pain to sue.

Bottom Line: Land Trusts Have Many Benefits for Real Estate Investors

The list above is far from exhaustive. There are many more nuances and benefits to land trusts, some of which may apply only in certain situations. For instance, some married couples love them because they allow for a legal ownership method known as tenancy-by-the-entireties. Land trusts can be used like savings accounts backed by appreciating assets, as estate planning tools, for executing transfers around the due-on-sale clause, and many more cool legal tricks.

Just know that using this tool can get you all sorts of perks, and don’t overlook land trusts when constructing your asset protection strategy. You’d just be cheating yourself.

Understanding How Important Rental Property Liability Protection Is for Modern Investors

Are you a landlord? Do you run your business in a haphazard and lax manner with no regard to how your tenants and other potential litigants perceive you? Are you totally clueless about how to reduce risks and limit personal liability? Then you’re what we refer to in legal circles as a high-profile target. You’re basically walking around with a “SUE ME!” neon sign on your forehead. To understand the importance of taking a proactive approach towards rental property liability protection, you need to be aware of some of the flimsy and not-so-flimsy reasons that can result in substantial damage awards.

7 Ways You Can Lose Your Shirt Without Rental Property Liability Protection

Disagreements

The number one reason for lawsuits is disagreements as demonstrated by one of our clients. You can do very little to prevent them from happening, even on your best behavior. If you don’t have an asset protection strategy in place, then you might as well hand over the keys to your castle to a complete stranger. We recommend setting up a Series LLC and shell companies to hide your assets from litigants.

Injury on the Premises

You will be held personally responsible for injuries to tenants and guests that occur on your property. If the litigant can prove that the injury was caused by negligent behavior on your part, then you might be in for it.

Dangerous Conditions

Sometimes, it’s not even necessary for the litigant to prove negligence. If they can show that you know, or should have known, about a dangerous condition on your property and you failed to remedy it or give adequate warning, then you will have to pay up.

Vehicle Liability

Any vehicle used by your business including those of employees and agents can result in a claim that can expose your business to a liability. It may have nothing to do with your tenants but you may have little recourse if you have not adopted smart liability protection strategies.

Dogs and Critters

Pets and other animals can also expose you to liability. This is the reason why most landlords prohibit dogs on their property. While you won’t necessarily assume liability for your tenant’s dog, all that the litigant needs to prove is that you “knew” or “should have known” the dog was dangerous or that you exercised some control over it. As you can imagine, it wouldn’t take much doing to prove this.

Security Issues

It’s not your responsibility to protect tenants from criminal acts. However, the law has evolved to a point where it’s possible in some circumstances to take responsibility for the tenant’s security. You’re expected to keep the common areas such as stairways, hallways, and elevators safe from criminals.

Bad Tenant Behavior

You may assume liability for the bad behavior of a tenant. If you are aware of any obnoxious, unlawful or other bad behavior by tenants, you should take the necessary steps to protect the other affected tenants. Failure to do this could result in a lawsuit.

There are plenty of lawsuits based on liability claims that can arise from other sources such as invasion of privacy, libel, slander, and discrimination based on religious beliefs, race, or even evictions. This is why you need to establish an LLC as the first step towards protecting your investment from liability claims. We can help you come up with an asset protection strategy that will hide your personal assets and make you an undesirable target.

Protect Yourself from Swimming Pool Liabilities

For those that don't remember, we're going to start with a real case that was all over the news. You may have even heard about it at the time.

We're doing this to make some general points about the risks all pool owners face. Being rich and famous won't save you from an improperly maintained or managed pool. It sure didn't help Demi Moore.

Swimming Pool Lawsuit Case Study: What Happened to Demi Moore

Demi Moore’s assistant had a pool party in 2015 at Demi Moore’s California home where alcohol was served. Somebody drowned. It was an unfortunate accident and Demi Moore, who wasn’t even at the party, was quickly swimming in litigation.

It sounds so ridiculous it could be the plot of one of Demi’s erotica thrillers.

There are carefully outlined state safety regulations that you have to comply with if you don’t want to end up on the witness stand with Tom Cruise screaming at you. In most states you are responsible for keeping your pool reasonably safe.

It doesn’t matter that it was Demi’s assistant who held the party. Demi owns the pool. Demi is responsible.

Understanding How Swimming Pool Lawsuits Happen

There are two ways you can be considered too lazy, cheap or careless to own a pool under the law:

#1 You violate a local pool safety law

In this case, you’re strictly liable, like Demi Moore.

The solution here is simple. Bring your death trap up to code. Find out what the law is and comply. Build a fence and put on a pool cover. These are the basics.

# 2. Your pool is deemed “unsafe”

This is trickier, from a liability standpoint. Broken fences, rusty nails, lack of depth markings, and more can make a pool unsafe. Once again, this varies, but I’m sure through the use of the computer you are using to watch this video, you can figure out your local regulations. Better yet, contact an asset protection attorney to help you understand them.

Here’s another issue, and this one is key. If you party by your pool and your friends enjoy drinking cocktails, you may want to consider hiring a lifeguard for the afternoon. Preferably a sober lifeguard.

It’s a small expense that may keep somebody alive. If the conditions at the party are deemed unsafe (SEE: Rooftop cannonball championships) you might be on the hook.

Remember, like Demi, you might be liable even if you are not at the party so be sure that there are safety measures in play. It’s the summer time, so party hard. Just don’t end up paying for it.

In short, if you own the pool, you are responsible for its compliance with safety regulations. Landlords must keep this in mind when considering tenants. But you also have to make sure that everything you own is up to those same safety standards. Sorry fellas, but it’s not all collecting rent checks. Even trespassers can hold you liable if they get hurt in your unsafe pool.

How to Prevent Swimming Pool Lawsuits

Here’s a short summary of what you need to do if you want to avoid fishing dead bodies out of your pool and the costly lawsuits that come with it.

1. Comply with all safety requirements for your city and state. If you can’t afford them, you can’t afford a pool. But you’re a good little saver. Maybe next year.
2. Include a clause or separate pool disclosure and waiver. This is a tip for landlords or investors with rental property. Taking a few minutes to do this could save your ass in court. That way if some fool wants to work on his swan dive after his tenth martini, he’s already assumed the liability at least in part.

Your waiver should include the following:

Tenants use the pool at their own risk.
Children and tenants who cannot swim must be supervised.
This should be a no-brainer for parents of small children, but lets not forget that Darwin’s theories make provisions for the unfit. Unfortunately you still have to pay for the mistakes of the less evolved if they end up floating in your pool.
Tenant is responsible for the safety and maintenance of the pool equipment. Make it clear that they are required to inform you of any safety or repair issues the moment they arise.
If the tenant is having guests, make them responsible for supervising the pool at all times. Demi Moore can afford a lifeguard, but just a sober person will do.Some other actions you can take to protect yourself are:
Insure the pool. Tell your insurance agent about it. If they won’t grant you insurance, close the pool and get it up to their standards. Yes, it sucks paying for insurance. It sucks more losing your investment.
Own your property under an LLC.
Develop a comprehensive asset protection strategy that includes the property with a pool. Ask your attorney what actions you can take to ensure compliance with local law.

Asset Protection with Royal Legal Solutions Can Keep You Above Water

Losing your investment, as noted above, is terrible. Losing your house is much worse. When it comes to owning a pool, be PROACTIVE with your liability before you have to be REACTIVE to a lawsuit.

Yes, there is work, responsibility and expense here, but you need to own a pair of big boy trunks before you go swimming in liability. Royal Legal Solutions can help you address legal matters relating to your pool and construct an asset protection plan that keeps you out of court. If you would like advice on how to navigate this issue or begin protecting your assets like the pros, send us a message take our quick investor quiz for landlords and investors.

What is a Charging Order?

So what's a charging order? I'd like to answer this question with a story.

Let's say I'm a real estate investor (I really am) who has all his properties properly structured inside of an LLC. One day I get into a car wreck.

This results in a judgment against me because it exceeded the limits of the liability for my auto-insurance policy. Because of that they want to try and shake down my LLC.

But they can't touch my LLC. This is due to the protections that an LLC gives you. It allows your assets to be protected from the personal actions you take in your day to day life. And then of course the charging order comes into play.

How Charging Orders Work

The charging order protects you from creditors. It's not something you get in the mail. In most states, there are 3 things a charging order prevents creditors from doing:

Taking your membership interest in an LLC,
Taking over the management function of your LLC
Force your LLC to sell its assets

In the unlikely event you do lose a lawsuit with an LLC, you'll be okay for the most part. However, you don't just get off "Scott free" (ironically, my name is Scott and I get people off all the time when it comes to lawsuits.)

How a Lien Can Affect Your LLC

What they can do is put a lien against your LLC. If the creditors put a lien against your LLC, that means any distributions from your LLC to you will go straight to your creditors.

Not to worry, there are ways around a lien if you do ever end up with one against your LLC, or an LLC you have an interest in.
One of the ways to get around a lien is to sell your interest in the LLC to another party. They won't be able to touch the money you gain from that sale, which makes the lien useless.

Make sure you know the laws regarding a charging order before you form one in a specific state. As always when it comes to an LLC structure. some states offer certain advantages and disadvantages.

Fun Fact: The charging order wasn't originally created to protect debtors. It was actually meant to protect co-owners of an LLC from having to work with creditors or a deceased co-owners spouse.

Thanks for reading. If you need assistance with your LLC, contact us today.